Employees enrolled in Section plans have their employer reserve part of their pretax cash earnings that they can then use to cover the costs of qualified benefits. A common example of a Section plan is a flexible spending account FSA , in which employees set aside pretax dollars from their paycheck to be used for qualifying medical expenses. As with most benefits, there is no obligation to participate in a Section plan. Some employees may choose to decline the option in favor of standard cash wages.
However, for many employees, setting aside money before taxes are taken out is a preferable option. In a Section plan, an employer sets aside a portion of an employee's pretax wages to cover the costs of the plan's qualified benefits.
As such, the employee never receives this money as part of their standard wages, so federal income tax is not taken on these earnings. Although taxes are not levied on these wages, you must still report them on your employees' W-2 forms. No matter the benefits you offer in your cafeteria plan, you are responsible for managing it.
However, you can seek assistance from accountants and other tax experts. All types of employers can open a Section plan, including C corporations, S corporations, partnerships, limited liability companies and sole proprietors.
Government entities can also offer these types of benefits to employees. You should also know who on your team qualifies for cafeteria plan coverage. Typically, all employees who spent at least 1, hours working for your company in the previous calendar year qualify for your current plan year.
That said, you can exclude two employee groups from your coverage: employees under 21 and those who have worked for your company for less than a year. No matter which benefits you choose to include in your plan, you must specify in writing what your Section plan encompasses, how employees can qualify for these programs and how employees can choose the benefits that are right for them.
According to Section of the Internal Revenue Code , cafeteria plans can cover the following qualified benefits:. FSAs typically include annual maximums and stipulate that funds don't carry over from one plan year to the next. Additionally, one exception exists regarding HSA coverage through cafeteria plans.
This exception applies if your company offers health reimbursement arrangements HRAs through which your company covers your employees' qualified medical expenses or insurance premiums. If this is the case and your employee has obtained insurance outside federal or state health insurance marketplaces or exchanges, the employee can use their cafeteria plan set-asides to cover non-HRA medical expenses and insurance premiums.
This is the only case in which cafeteria plans can include HRAs. Once you begin offering Section plans, you must conduct nondiscrimination testing. Your company's Section plan must pass these three nondiscrimination tests :. If your company lapses on meeting these requirements, employees whom your Section structure favors may lose favorable tax treatment.
However, participants whom your plan does not favor will not lose tax benefits. Even when your Section plan is accidentally discriminatory, it includes remedies for the disadvantaged parties. What Are the Benefits of a Section Plan?
Max Freedman. Section plans offer employees significant tax savings and could be an appealing part of any benefits package. What is a Section plan cafeteria plan? A flexible spending arrangement FSA is a form of cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified benefits.
An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements. The maximum amount of reimbursement which is reasonably available to a participant for such coverage must be less than percent of the value of the coverage. In the case of an insured plan, the maximum amount reasonably available must be determined on the basis of the underlying coverage.
An FSA cannot provide a cumulative benefit to the employee beyond the plan year. Adoption assistance benefits provided in a cafeteria plan are subject to social security, Medicare, and FUTA taxes, but not income tax withholding.
If an employee elects to receive cash instead of any qualified benefit, it is treated as wages subject to all employment taxes. Employees can only be reimbursed for allowable, documented expenses incurred during the plan year, after the expenses have been substantiated.
Cafeteria plans can offer health insurance to employees, their spouses and their dependents. The domestic partner and dependents in this case may not be participants in a cafeteria plan because they are not employees, but the plan may provide benefits to them.
More In File. What is a cafeteria plan? Qualified benefits include the following: Accident and health benefits but not Archer medical savings accounts or long-term care insurance Adoption assistance Dependent care assistance Group-term life insurance coverage Health savings accounts, including distributions to pay long-term care services The written plan must specifically describe all benefits and establish rules for eligibility and elections.
Who may receive benefits under a cafeteria plan? Is there a filing requirement for a cafeteria plan? How does a cafeteria plan work? Typically, they can use the pre-tax money to pay for health insurance premiums, retirement deposits, or other benefit options. Instead, it allows employees to use pre-tax money to choose and pay for the types of insurance coverages that are most meaningful to them.
An example of the taxable benefit option could be allowing employees to take the monthly amount as part of their salary rather than applying it towards the benefit plan. If an employee opts out of the plan, he or she does not receive compensation for the amount their premiums would have cost. With a Section Cafeteria Plan, however, the employer may choose in this situation to offer the cost of the benefits as cash. The employee may use the money towards another benefit.
Although, if the employee receives cash, that money is taxed.
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